<PAGE> 1
FORT THOMAS FINANCIAL CORPORATION
1999 ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
President's Letter to Stockholders 1
Corporate Profile 2
Selected Consolidated Financial Highlights 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Stock Information 14
Report of Independent Certified Public Accountants 16
Consolidated Financial Statements 17-49
Directors and Officers 50
Banking Locations 50
Stockholder Information 51
</TABLE>
<PAGE> 3
Dear Stockholders:
Our fifth annual report covers the year ended September 30, 1999, a
period of time which was highlighted by increased net income and continued
quarterly dividend payments. Our fiscal 1999 results reflect management's
efforts in leveraging our capital in order to maximize stockholder value. In
furtherance of maximizing stockholder value, we announced on December 21, 1999,
our proposed merger with The Bank of Kentucky Financial Corporation.
FISCAL 1999 RESULTS
Net income for fiscal 1999 amounted to $1.0 million or $.71 per share
compared to $989,000 or $.70 per share for fiscal 1998. The 3.1% increase was
primarily due to decreased provision for loan losses of $217,000 to $68,000, and
a decrease in General and Administrative Expenses of $56,000 or 2.2% to $2.4
million in 1999 from 1998 levels. Net interest income, the Company's primary
determinant of net income, decreased due to an increase in the average
interest-earning liabilities of $4.7 million or 5.6% to $88.3 million in 1999
from $83.7 million in 1998. The increase in average interest-earning liabilities
was partially offset by an increase in the average interest earning assets of
$1.9 million or 1.9% to $100.6 million in 1999 from 98.7 million in 1998.
OUTLOOK
We were pleased to announce our proposed merger with The Bank of
Kentucky Financial Corporation on December 21, 1999. Under the terms of the
merger agreement, each shareholder will receive .5645 of a share of common stock
of The Bank of Kentucky Financial Corporation for each share of our stock. Based
on the closing price of $32.00 per share for The Bank of Kentucky Corporation
common stock on December 21, 1999, the per share value to our stockholders would
be $18.06. The transaction value is equivalent to approximately 2.01 times our
fully diluted tangible book value at September 30, 1999 and approximately 27
times our earnings over the latest 12 months. We presently expect the closing to
occur in the second quarter of 2000. We believe this is a complimentary
transaction for Fort Thomas Financial Corporation and we look forward to being
associated with The Bank of Kentucky Financial Corporation.
I would like to thank our directors, officers and employees for their
continued service and dedication to the Company. I would also like to thank you
as a stockholder for your confidence in Fort Thomas Financial Corporation.
Sincerely,
Larry N. Hatfield
President
1
<PAGE> 4
CORPORATE PROFILE
Fort Thomas Financial Corporation (the "Company") was incorporated in
March 1995 under Ohio law for the purpose of acquiring all of the capital stock
issued by Fort Thomas Federal Savings and Loan Association in connection with
its conversion from a federally chartered mutual savings and loan association to
a federally chartered stock savings bank (the "Conversion"). The Conversion was
consummated on June 27, 1995 and, as a result, the Company became a unitary
savings and loan holding company for its wholly owned subsidiary, Fort Thomas
Savings Bank, F.S.B. (the "Savings Bank"). The Company has no significant assets
other than the shares of the Savings Bank's common stock acquired in the
Conversion, the loan to the Employee Stock Ownership Plan ("ESOP") and that
portion of the net proceeds of the Conversion retained by the Company.
The Savings Bank is a federally chartered stock savings bank conducting
business from two full-service offices located in Campbell County, Kentucky. The
Savings Bank is a community oriented savings bank which has traditionally
offered a wide variety of savings products to its retail customers while
concentrating its lending activities on real estate loans secured by one-to-four
family residential properties located in Campbell County, Kentucky and
surrounding counties in northern Kentucky. To a lesser extent, the Savings Bank
also focuses its lending activities on multi-family, residential real estate
loans, and land and construction loans. The Savings Bank also invests in
securities, which are issued by United States government and agency securities.
The Company's and the Savings Bank's principal offices are located at 25
North Fort Thomas Avenue, Fort Thomas, Kentucky 41075, and their telephone
number is (606) 441-3302.
2
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
SELECTED FINANCIAL DATA:
Total assets $ 99,849 $103,611 $ 97,873 $ 88,013 $ 86,214
Loans receivable, net 88,709 92,795 88,452 77,987 71,156
Investment and mortgage-backed securities 6,241 3,754 3,788 4,813 5,973
Deposits 70,870 76,851 71,858 63,731 59,998
Borrowed funds 13,739 12,526 8,846 6,754 3,651
Stockholders' equity 13,662 12,713 15,786 15,921 21,790
SELECTED OPERATING DATA:
Interest income 8,313 8,502 7,970 7,285 6,251
Interest expense 4,482 4,459 4,138 3,517 3,182
-------- -------- -------- -------- --------
Net interest income 3,831 4,043 3,832 3,768 3,069
Provision for loan losses 68 285 137 125 25
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 3,763 3,758 3,695 3,643 3,044
Other income 236 279 268 177 161
Other expenses 2,449 2,505 2,237 3,028 1,784
-------- -------- -------- -------- --------
Income before income taxes 1,550 1,532 1,726 792 1,421
Income tax 530 543 587 275 460
-------- -------- -------- -------- --------
Net income $ 1,020 $ 989 $ 1,139 $ 517 $ 961
======== ======== ======== ======== ========
SELECTED OPERATING RATIOS(1):
Average interest rate spread(2) 3.18% 3.28% 3.31% 3.13% 3.49%
Net interest margin(2) 3.81 4.10 4.19 4.39 4.11
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.93 118.06 119.34 130.80 114.53
Return on average assets .99 .95 1.21 .59 1.25
Return on average equity 7.80 5.96 7.26 2.54 9.55
ASSET QUALITY RATIOS(3):
Nonperforming assets as a percent of
total assets(4) 2.52% 3.46% 1.98% 1.34% 1.44%
Allowance for loan losses as a
percent of total loans .66 .73 .53 .45 .32
Allowance for loan losses as a
percent of nonperforming loans 27.13 19.65 24.57 31.02 19.20
CAPITAL RATIOS(3):
Tangible capital ratio 12.78% 15.35% 16.94% 19.04% 19.38%
Core capital ratio 12.78 15.35 16.94 19.04 19.38
Risk-based capital ratio 19.89 24.90 24.32 29.90 31.64
</TABLE>
(1) With the exception of end of period ratios, all ratios are based on
average monthly balances during the indicated periods.
(2) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities, and net interest margin represents net
interest income as a percent of average interest-earning assets.
(3) Asset Quality Ratios and Capital Ratios are end of period ratios.
Capital Ratios reflect the Savings Bank's capital ratios calculated
under regulations of the Office of Thrift Supervision ("OTS").
(4) Nonperforming assets consist of nonperforming loans and real estate
owned ("REO"). Nonperforming loans consist of non-accrual loans and
accruing loans 90 days or more overdue, while REO consists of real
estate acquired through foreclosure.
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Management's discussion and analysis is intended to assist in
understanding the financial condition and results of operations of the Company.
The information contained in this section should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements and the other sections contained in this Annual Report.
The Company's results of operations depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
The Company's results of operations also are affected by the provision for loan
losses, resulting from management's assessment of the adequacy of the allowance
for loan losses; the level of its other income; the level of its other expenses;
and income tax expense.
Net income for fiscal 1999, 1998 and 1997 amounted to $1,020,000,
$989,000 and $1,139,000, respectively. Net income during such periods primarily
resulted from net interest income, which amounted to $3.8 million, $4.0 million
and $3.8 million, respectively, for fiscal 1999, 1998 and 1997. The interest
rate spread and the amount of interest-earning assets and interest-bearing
liabilities determine net interest income. During fiscal 1999, 1998 and 1997,
the Company's average interest rate spread was 3.18%, 3.28%, and 3.31%,
respectively. In addition, at September 30, 1999, 1998 and 1997, the ratio of
average interest-earning assets to average interest-bearing liabilities amounted
to 113.93%, 118.06% and 119.34%, respectively.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
market interest rates generally and in the Company's market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters:
1. Management's determination of the amount of and adequacy of the
allowance for loan losses;
2. The effect of changes in interest rates; and
3. Management's opinion as to the effects of recent accounting
pronouncements on the Company's consolidated financial statements.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities that either re-price or mature within a given
period of time. The difference, or the interest rate re-pricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest
4
<PAGE> 7
rates. A gap is considered positive when the amount of interest-rate sensitive
assets exceeds the amount of interest-rate sensitive liabilities, and is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets. Generally, during a period
of rising interest rates, a negative gap within shorter maturities would
adversely affect net interest income. A positive gap within shorter maturities
would result in an increase in net interest income. During a period of falling
interest rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter maturities
would have the opposite effect.
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Savings Bank's management has implemented and continues to monitor asset and
liability management policies. These policies are intended to better match the
maturities and re-pricing terms of the Savings Bank's interest-earning assets
and interest-bearing liabilities. Such policies have consisted primarily of
emphasizing investment in adjustable-rate mortgage loans ("ARMs").
The Savings Bank focuses its lending activities on the origination of
one and three-year ARMs. Although adjustable-rate loans involve certain risks,
such loans decrease the risks associated with changes in interest rates. As a
result of the Savings Bank's efforts, as of September 30, 1999, $55 million or
72% of the Savings Bank's portfolio of one-to-four family residential mortgage
loans consisted of ARMs.
With respect to liabilities, the Savings Bank prices deposit accounts
based upon competitive factors. Pursuant to this policy, the Savings Bank has
generally neither engaged in sporadic increases or decreases in interest rates
paid nor offered the highest rates available in its deposit market except upon
specific occasions to control deposit flow or when market conditions have
created opportunities to attract longer-term deposits. In addition, the Savings
Bank does not pursue an aggressive growth strategy that would force the Savings
Bank to focus exclusively on competitors' rates rather than affordability. This
policy has assisted the Savings Bank in controlling its cost of funds.
MARKET RISK MANAGEMENT
Market risk is the risk of loss arising from adverse changes in the
fair value of financial instruments due to interest rate risk, exchange rate
risk, equity price risk and commodity price risk. The Savings Bank does not
maintain a trading account for any class of financial instrument, and is not
currently subject to foreign currency exchange rate risk, equity price risk or
commodity price risk. The Savings Bank's market risk is composed primarily of
interest rate risk.
Management also presently monitors and evaluates the potential impact
of interest rate changes upon the market value of the Savings Bank's portfolio
equity and the level of net interest income on a quarterly basis. The OTS
adopted a final rule in August 1993 incorporating an interest rate risk
component into the risk-based capital rules. Although the Savings Bank is not
presently subject to the interest rate risk component of the risk-based capital
rules, the maturity/rate data is voluntarily submitted to the OTS so that
management remains aware of the potential impact of interest rate changes as
reported quarterly by the OTS in its interest rate risk exposure report.
Utilizing this measurement concept, at September 30, 1999, there would have been
a slight decrease in the Savings Bank's NPV of approximately 0.8% of the present
value of its assets, assuming a 200 basis point increase in interest rates.
5
<PAGE> 8
The following table presents the Savings Bank's net portfolio value
("NPV") and the ratio of NPV to the present value ("PV") of assets as of
September 30, 1999, as calculated by the OTS, based on information provided to
the OTS by the Savings Bank.
<TABLE>
<CAPTION>
NET PORTFOLIO VALUE
- --------------------------------------------------------------------------------
CHANGE IN ESTIMATED NPV
INTEREST RATES AS A % $ CHANGE % CHANGE IN
(BASIS POINTS) ESTIMATED NPV OF PV OF ASSETS IN NPV NPV
- -------------- ------------- --------------- -------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
+300 13,893 14.24% $(2,419) (14.8)%
+200 15,152 15.26% (1,160) (7.1)%
+100 15,992 15.88% (320) (1.9)%
- 16,312 16.04% - -
-100 16,282 15.91% (30) (0.2)%
-200 16,379 15.88% 67 0.4%
-300 16,687 16.02% 375 2.2%
</TABLE>
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's assets decreased from $103.6 million at
September 30, 1998 to $99.8 million at September 30, 1999, a decrease of $3.8
million or 3.7%. Loans receivable, net decreased $4.1 million or 4.4% from $92.8
million at September 30, 1998 to $88.7 million at September 30, 1999. Such
decrease resulted primarily from a decrease in single-family and multi-family
residential loans.
Total liabilities decreased $4.7 million or 5.2% between September 30,
1998 and September 30, 1999 due primarily to a decrease in deposits of $6.0
million or 7.8, partially offset by an increase in borrowed funds of $1.2
million or 9.7%.
Stockholders' equity increased $1.0 million from $12.7 million, or
12.3% of total assets, at September 30, 1998 to $13.7 million, or 13.7% of total
assets, at September 30, 1999. This increase was primarily due to net income of
$1.0 million, and partially offset by dividends paid in fiscal year 1999 of
$369,000.
6
<PAGE> 9
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following average balance sheet table sets forth for the periods
indicated, information on the Company regarding: (i) the total dollar amounts of
interest income on interest-earning assets and the resulting average yields;
(ii) the total dollar amounts of interest expense on interest-bearing
liabilities and the resulting average costs; (iii) net interest income; (iv)
interest rate spread; (v) net interest-earning assets (interest-bearing
liabilities); (vi) the net yield earned on interest-earning assets; and (vii)
the ratio of average interest-earning assets to average interest-bearing
liabilities. Information is based on average monthly balances during the periods
presented.
<TABLE>
<CAPTION>
At September 30, Year Ended September 30,
---------------- ----------------------------------------
1999 1999
---------------- ----------------------------------------
Average Average
Yield/Rate Balance Interest Yield/Rate
---------------- -------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C>
Total loans, net(1) 8.30% $ 90,664 $7,762 8.56%
Mortgage-backed securities -- -- -- --
Investment securities 5.71 4,650 280 6.02
Other interest-earning assets 5.50 5,292 271 5.12
------ -------- ------ ------
Total interest-earning assets 8.06 100,606 8,313 8.26
------ -------- ------ ------
Noninterest-earning assets 2,268
--------
Total assets 102,874
--------
Interest-bearing liabilities:
Savings deposits 2.53 15,060 381 2.53
Other time deposits 5.48 60,836 3,462 5.69
Borrowed funds 5.14 12,404 639 5.15
------ -------- ------ ------
Total interest-bearing liabilities 4.91 88,300 4,482 5.08
------ -------- ------ ------
Noninterest-bearing liabilities 1,496
--------
Total liabilities 89,796
--------
Stockholders' equity 13,078
--------
Total liabilities and equity 102,874
--------
Net interest-earning assets $ 12,306
========
Net interest income/interest rate spread 3.15% $3,831 3.18%
====== ======
Net interest margin(2) 3.80% 3.81%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 115.16% 113.93%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------------------------------
1998 1997
--------------------------------------- ----------------------------------------
Average Average Average Average
Balance Interest Yield/Rate Balance Interest Yield/Rate
-------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Total loans, net(1) $ 91,487 $8,079 8.83% $83,912 $7,499 8.94%
Mortgage-backed securities 13 1 -- 795 50 6.29
Investment securities 3,365 210 6.24 3,898 254 6.52
Other interest-earning assets 3,852 212 5.50 2,932 167 5.70
-------- ------ ------ ------- ------ ------
Total interest-earning assets 98,716 8,502 8.61 91,537 7,970 8.71
-------- ------ ------ ------- ------ ------
Noninterest-earning assets 3,232 2,269
-------- -------
Total assets 102,659 93,806
-------- -------
Interest-bearing liabilities:
Savings deposits 13,762 366 2.66 13,451 352 2.62
Other time deposits 60,278 3,572 5.93 54,312 3,263 6.01
Borrowed funds 9,577 521 5.44 8,937 523 5.85
-------- ------ ------ ------- ------ ------
Total interest-bearing liabilities 83,618 4,459 5.33 76,699 4,138 5.40
-------- ------ ------ ------- ------ ------
Noninterest-bearing liabilities 2,458 1,428
-------- -------
Total liabilities 86,076 78,127
-------- -------
Stockholders' equity 16,583 15,679
-------- -------
Total liabilities and equity 102,659 93,806
-------- -------
Net interest-earning assets $ 15,098 $14,837
======== =======
Net interest income/interest rate spread $4,043 3.28% $3,832 3.31%
====== ====== ====== ======
Net interest margin(2) 4.10% 4.19%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.06% 119.34%
====== ======
</TABLE>
(1) Total loans, net includes non-accruing loans.
(2) Net interest margin is net interest income divided by interest-earning
assets.
7
<PAGE> 10
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Savings Bank's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in rate
and volume. The combined effect of changes in both rate and volume has been
allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------------- ------------------------------------
Increase Increase
(Decrease) Due To (Decrease) Due to
------------------- --------------------
Total Total
Increase Increase
Rate Volume (Decrease) Rate Volume (Decrease)
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
(In Thousands)
Interest-earnings assets:
Total loans receivable, net $(281) $ (36) $(317) $ (97) $ 677 $ 580
Mortgage-backed securities -- (1) (1) -- (49) (49)
Investment securities (25) 95 70 (9) (35) (44)
Other interest-earning assets (19) 78 59 (7) 52 45
----- ----- ----- ----- ----- -----
Total interest-earning assets (325) 136 (189) (113) 645 532
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Savings deposits (2) 17 15 (6) 8 14
Other time deposits (127) 17 (110) (49) 358 309
Borrowed funds (12) 130 118 (39) 37 (2)
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities (141) 164 23 (83) 404 321
----- ----- ----- ----- ----- -----
Increase (decrease) in net interest income $(184) $ (28) $(212) $ (30) $ 241 $ 211
===== ===== ===== ===== ===== =====
</TABLE>
8
<PAGE> 11
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
1998
GENERAL. The Company's net income amounted to $1,020,000 or $.71 per
share for fiscal 1999 compared to $989,000 or $.70 per share for fiscal 1998.
The increase of $31,000 or 3.1% in net income for fiscal 1998 was primarily due
to a decrease in provision for loan losses, partially offset by a decrease in
net interest income.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income decreased $212,000 or 5.2% to
$3.8 million for fiscal 1999 compared to fiscal 1998. The decrease in the
average interest rate spread to 3.18% for fiscal 1999 compared to 3.28% for
fiscal 1998 along with a decrease in average net interest-earning assets of $2.8
million or 18.5% to $12.3 million for fiscal 1999 from $15.1 million for fiscal
1998, both contributed to the decrease in net interest income. The net interest
margin for fiscal 1999 was 3.81% compared to 4.10% for fiscal 1998.
INTEREST INCOME. Interest income amounted to $8.3 million for fiscal
1999, a decrease of $189,000 or 2.2% compared to interest income of $8.5 million
for fiscal 1998. Such decrease was primarily due to a decrease in interest
income on loans as a result of a decrease in the average balance of loans and by
a decrease in the average yield earned on such assets. The average balance of
loans receivable decreased $823,000 or 0.9% to $90.6 million for fiscal 1999
compared to $91.5 million for fiscal 1998. The average yield earned on such
assets decreased to 8.56% for fiscal 1999 compared to 8.83% for fiscal 1998. The
decrease in the average balance of loans receivable was primarily due to the
decrease of single-family and multi-family residential mortgage loans.
INTEREST EXPENSE. Interest expense increased $23,000 or 0.5% to $4.5
million for fiscal 1999 compared to fiscal 1998. The increase was primarily due
to an increase in the average balance of borrowed funds of $2.8 million or 29.5%
to $12.4 million for fiscal 1999 compared to $9.6 million for fiscal 1998. This
was substantially offset by a decrease in overall cost of funds of twenty-five
basis points from 5.33% in fiscal year 1998 to 5.08% in fiscal year 1999.
PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$68,000 and $285,000 for fiscal 1999 and 1998, respectively. The allowance for
loan losses as a percent of total loans and as a percent of non-performing loans
was .66% and 27.13%, respectively, for fiscal 1999 compared to .73% and 19.65%,
respectively, for fiscal 1998. The decrease in the provision in 1999 was
primarily due to the decrease in the Savings Bank's non-performing loans.
The Savings Bank establishes provisions for loan losses in order to
maintain the allowance for loan losses at a level deemed to be appropriate. This
level is based upon management's assessment of prior loss experience, the volume
and type of lending conducted by the Savings Bank, industry standards, past due
loans, economic conditions in the Savings Bank's market area and generally and
other factors related to the collectibility of the Savings Bank's loan
portfolio. A significant majority of the Savings Bank's non-performing loans has
historically consisted of one-to-four family loans. Due to the stability of the
local economy, the lower level of risk involved with such loans and the minimal
level of charge-offs, the Savings Bank has maintained its allowance for loan
losses at a level deemed adequate by management. However, this level is lower
than most industry standards with respect to the allowance as a percent of both
total non-performing loans and total loans.
9
<PAGE> 12
OTHER INCOME. Other income amounted to $236,000 for fiscal 1999
compared to $279,000 for fiscal 1998, a decrease of $43,000 or 15.4%. Such
decrease was primarily due to a decrease in fees and charges.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased $56,000 or 2.2% to $2.4 million for fiscal 1999 compared to
fiscal 1998. Such decrease was primarily due to a decrease of $44,000 or 3.1% in
compensation and employee benefits and a decrease of $6,000 or 4.0% in franchise
and other taxes. The decrease in compensation and employee benefits was
primarily due to a decrease in benefits related to the Company's Employee Stock
Ownership Plan ("ESOP") and partially offset by normal salary and merit
increases. The decrease related to the ESOP was primarily attributable to the
release of additional shares of Common Stock in 1998 as a result of the special
distribution of $2.75 per share paid in fiscal 1998. Accordingly, the Company
expected such costs to decrease in fiscal 1999.
INCOME TAXES. Total income taxes amounted to $530,000 and $543,000 for
fiscal 1999 and 1998, respectively. The effective tax rate was 34.2% and 35.4%,
respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
1997
GENERAL. The Company's net income amounted to $989,000 or $.70 per
share for fiscal 1998 compared to $1.1 million or $.79 per share for fiscal
1997. The decrease of $150,000 or 13.2% in net income for fiscal 1998 was
primarily due to an increase in general and administrative expenses and
partially offset by an increase in net interest income.
NET INTEREST INCOME. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's net interest income increased $211,000 or 5.5% to
$4.0 million for fiscal 1998 compared to fiscal 1997. The decrease in the
average interest rate spread to 3.28% for fiscal 1998 compared to 3.31% for
fiscal 1997 was offset by an increase in average net interest-earning assets of
$300,000 or 1.3% to $15.1 million for fiscal 1998 from $14.8 million for fiscal
1997. The net interest margin for fiscal 1998 was 4.10% compared to 4.19% for
fiscal 1997.
INTEREST INCOME. Interest income amounted to $8.5 million for fiscal
1998, an increase of $532,000 or 6.7% compared to interest income of $8.0
million for fiscal 1997. Such increase was primarily due to an increase in
interest income on loans as a result of an increase in the average balance of
loans and partially offset by a decrease in the average yield earned on such
assets. The average balance of loans receivable increased $7.6 million or 9.1%
to $91.5 million for fiscal 1998 compared to $83.9 million for fiscal 1997. The
average yield earned on such assets decreased to 8.83% for fiscal 1998 compared
to 8.94% for fiscal 1997. The increase in the average balance of loans
receivable was primarily due to the origination of single-family mortgage loans.
INTEREST EXPENSE. Interest expense increased $321,000 or 7.8% to $4.5
million for fiscal 1998 compared to $4.1 million for fiscal 1997. The increase
was primarily due to an increase in the average balance of time deposits of $6.0
million or 11.0% to $60.3 million for fiscal 1998 compared to $54.3 million for
fiscal 1997. This was offset by a decrease in overall cost of funds of seven
basis points from 5.40% in fiscal year 1997 to 5.33% in fiscal year 1998.
10
<PAGE> 13
PROVISION FOR LOAN LOSSES. The provision for loan losses amounted to
$285,000 and $137,000 for fiscal 1998 and 1997, respectively. The allowance for
loan losses as a percent of total loans and as a percent of non-performing loans
was .73% and 19.65%, respectively, for fiscal 1998 compared to .53% and 24.57%,
respectively, for fiscal 1997. The increase in the provision in 1998 was
primarily due to the increase in the Savings Bank's non-performing loans.
The Savings Bank establishes provisions for loan losses in order to
maintain the allowance for loan losses at a level deemed to be appropriate. This
level is based upon management's assessment of prior loss experience, the volume
and type of lending conducted by the Savings Bank, industry standards, past due
loans, economic conditions in the Savings Bank's market area and generally and
other factors related to the collectibility of the Savings Bank's loan
portfolio. A significant majority of the Savings Bank's non-performing loans has
historically consisted of one-to-four family loans. Due to the stability of the
local economy, the lower level of risk involved with such loans and the minimal
level of charge-offs, the Savings Bank has maintained its allowance for loan
losses at a level deemed adequate by management. However, this level is lower
than most industry standards with respect to the allowance as a percent of both
total non-performing loans and total loans.
OTHER INCOME. Other income amounted to $279,000 for fiscal 1998
compared to $268,000 for fiscal 1997, an increase of $11,000 or 4.1%. Such
increase was primarily due to an increase in fees and charges.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $300,000 or 13.6% to $2.5 million for fiscal 1998 compared to
$2.2 million for fiscal 1997. Such increase was primarily due to an increase of
$233,000 or 19.9% in compensation and employee benefits and an increase of
$35,000 or 30.2% in franchise and other taxes. The increase in compensation and
employee benefits was primarily due to benefits related to the Company's
Employee Stock Ownership Plan ("ESOP") as well as normal salary and merit
increases. The increase related to the ESOP was primarily attributable to the
release of additional shares of Common Stock in 1998 as a result of the special
distribution of $2.75 per share paid in fiscal 1998. Accordingly, the Company
believes such costs will decrease in fiscal 1999.
INCOME TAXES. Total income taxes amounted to $543,000 and $587,000 for
fiscal 1998 and 1997, respectively. The effective tax rate was 35.4% and 34.0%,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Savings Bank's
primary sources of funds are deposits, borrowings, amortization, prepayments and
maturities of outstanding loans, sales of loans, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled loan amortization and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Company manages the pricing of its
deposits to maintain a steady deposit balance. In addition, the Company invests
excess funds in overnight deposits and other short-term interest-earning assets,
which provide liquidity to meet lending requirements. The Company has generally
been able to generate enough cash through the retail deposit market, its
traditional funding source, to offset the cash utilized in investing activities.
As an additional source of funds, the Company can borrow funds as needed. At
September 30, 1999, the Company had $13.7 million of borrowed funds.
11
<PAGE> 14
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits. On a longer-term basis, the Company maintains a
strategy of investing in various lending products. The Company uses its sources
of funds primarily to meet its ongoing commitments, to pay maturing savings
certificates and savings withdrawals and fund loan commitments. At September 30,
1999, the total approved loan commitments outstanding, excluding construction
loans, amounted to $3.6 million. At the same date, the unadvanced portion of
construction loans approximated $3.5 million. Certificates of deposit scheduled
to mature in one year or less at September 30, 1999 totaled $37.1 million. The
Company did not have any investment securities scheduled to mature in one year
or less at September 30, 1999. Management believes that a significant portion of
maturing deposits will remain with the Company. The Company anticipates that it
will continue to have sufficient funds to meet its current commitments.
The Savings Bank is required by the OTS to maintain average daily
balances of liquid assets and short-term liquid assets (as defined) in amounts
equal to 5% and 1%, respectively, of net withdrawable deposits and borrowings
payable in one year or less to assure its ability to meet demand for withdrawals
and repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Savings Bank generally maintains a liquidity ratio of between
5% and 10% of its net withdrawable deposits and borrowings payable in one year
or less. The Savings Bank's average quarterly liquidity ratio for September 1999
was 8.36%.
Federally insured savings institutions are required to satisfy three
different OTS capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to at least 1.5% of adjusted total
assets, "core" capital equal to at least 4% of adjusted total assets and "total"
capital (a combination of core and "supplementary" capital) equal to at least 8%
of "risk-weighted" assets. For purposes of the regulation, core capital is
defined as common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and qualifying supervisory
goodwill. Core capital is generally reduced by the amount of a savings
institution's intangible assets, although limited exceptions to the deduction of
intangible assets are provided for purchased mortgage servicing rights,
qualifying supervisory goodwill and certain other intangibles, all of which are
currently not relevant to the calculation of Savings Bank's regulatory capital.
Tangible capital is core capital less all intangible assets, with a limited
exception for purchased mortgage-servicing rights. Under the "prompt corrective
actions" regulations of the OTS, a savings bank that has not received the
highest possible examination rating may become subject to corrective action if
its core capital is less than 4% of its adjusted total assets.
The Savings Bank substantially exceeded each of the above-described
regulatory capital requirements at September 30, 1999.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation.
12
<PAGE> 15
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of the Statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events during the period other than transactions with owners
("Comprehensive income"). Comprehensive income is the total of net income and
all other nonowner changes in equity. The Statement is effective for fiscal
years beginning after December 15, 1997. Management has adopted this
pronouncement and it has not had a material effect on the disclosures or
accounting principles of the Company.
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." Statement No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. The Statement
is effective for fiscal years beginning after December 15, 1997. Management has
adopted this pronouncement and it has not had a material effect on the
disclosures or accounting principles of the Company.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits." Statement No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, and requires additional information on changes in the
benefit obligations and fair values of plan assets. This pronouncement had no
material effects on the disclosures or accounting principles of the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This pronouncement had no material effects on the disclosures or accounting
principles of the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." Statement No. 134 requires
entities conducting certain mortgage banking activities to classify
mortgage-backed securities retained after a securitization as trading
securities. This pronouncement had no material effects on the disclosures or
accounting principles of the Company.
13
<PAGE> 16
YEAR 2000 READINESS
Because the Savings Bank's operations rely extensively on computer
systems, the Savings Bank is addressing problems associated with the possibility
that computer systems will not recognize the year 2000 ("Y2K") correctly. The
Savings Bank has developed a Year 2000 Plan, which was presented to the Board of
Directors in 1997. The Board of Directors appointed a Year 2000 Coordinator,
which reports to the Board of Directors quarterly.
The Savings Bank relies primarily on third-party vendors for its
computer output and processing, as well as other significant functions and
services, such as securities safekeeping services, ATM service, and wire
transfers. The Year 2000 Coordinator has contacted all major vendors to assess
their Y2K readiness. Based upon this assessment, the Board of Directors believes
that the modifications to existing software and hardware and conversions to new
software and hardware, the third-party vendors have taken the appropriate steps
to ensure that critical systems will function properly. The modifications and
conversions are now complete.
All date-dependent equipment and related software throughout the
Savings Bank have been inventoried and tested for Y2K capabilities. Equipment
identified as not being Y2K compatible has been replaced. The cost for this new
hardware and software was approximately $35,000.
If the modifications and conversions by both third-party vendors and
the Savings Bank fail to function properly, the operations and financial
condition of the Company could be materially adversely affected. The Savings
Bank has developed contingency plans for continued operations in the event of
system failure.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to prepare properly for
Y2K, and higher funding costs could result if consumers react to publicity about
the issue by withdrawing deposits. The Savings Bank has assessed such risks
among its customers. The Company could also be materially adversely affected if
other third parties, such as governmental agencies, clearinghouses, telephone
companies, utilities and other service providers fail to prepare properly. The
Savings Bank has assessed these risks and has taken action to minimize their
effect.
STOCK INFORMATION
The Conversion was completed effective June 27, 1995. In connection
with the Conversion, the Company issued 1,573,775 shares of common stock to
certain depositors and borrowers of the Savings Bank, an employee benefit plan
of the Company and certain other depositors and borrowers.
At December 1, 1999, the Company had 1,474,321 shares of common stock
outstanding which were held by approximately 630 stockholders. Such figure does
not reflect the number of beneficial owners of common stock.
14
<PAGE> 17
The Company's common stock is quoted on the Nasdaq SmallCap Market
under the symbol "FTSB." The high and low bid quotations for the common stock
for each of the quarters in fiscal 1998 and 1999 as well as cash dividends
declared during these periods were:
<TABLE>
<CAPTION>
QUOTATIONS DIVIDENDS
------------------ -----------------------------
HIGH BID LOW BID AMOUNT PAYMENT DATE
<S> <C> <C> <C> <C>
DECEMBER 31, 1997 $15.50 $12.63 .0625 JANUARY 14, 1998
MARCH 31, 1998 15.63 14.13 .0625 APRIL 15, 1998
JUNE 30, 1998 15.75 14.00 .0625 JULY 15, 1998
SEPTEMBER 30, 1998 16.00 11.50 2.7500 SEPTEMBER 15, 1998
SEPTEMBER 30, 1998 16.00 11.50 .0625 OCTOBER 15, 1998
DECEMBER 31, 1998 14.25 10.25 .0625 JANUARY 13, 1999
MARCH 31, 1999 15.38 11.88 .0625 APRIL 13, 1999
JUNE 30, 1999 13.25 10.00 .0625 JULY 14, 1999
SEPTEMBER 30, 1999 16.50 11.50 .0625 OCTOBER 15, 1999
</TABLE>
The bid prices of the Company's common stock reflect inter-dealer
quotations and do not include markups, markdowns or commissions and may not
necessarily represent actual transactions.
15
<PAGE> 18
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report 17
Consolidated Financial Statements
Consolidated Statements of Financial Condition 18
Consolidated Statements of Income 19
Consolidated Statements of Stockholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to the Consolidated Financial Statements 22-49
</TABLE>
16
<PAGE> 19
250 GRANDVIEW DRIVE, SUITE 300
FORT MITCHELL, KY 41017-5610
VONLEHMAN & COMPANY INC.
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS ADVISORS
4221 MALSBARY ROAD, SUITE 102
CINCINNATI, OHIO 45242-5502
INDEPENDENT AUDITORS' REPORT
Board of Directors
Fort Thomas Financial Corporation
and Subsidiary
Fort Thomas, Kentucky
We have audited the accompanying consolidated statements of financial condition
of Fort Thomas Financial Corporation and Subsidiary as of September 30, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for the years ended September 30, 1999, 1998 and 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fort Thomas
Financial Corporation and Subsidiary at September 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years ended
September 30, 1999, 1998 and 1997 in conformity with generally accepted
accounting principles.
Fort Mitchell, Kentucky
October 29, 1999
17
<PAGE> 20
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1999 1998
-------- ---------
<S> <C> <C>
Assets
Cash and Cash Equivalents $ 723 $ 3,135
Investment Securities
Held to Maturity - at Amortized Cost (Market Value of $6,081 and
$3,762 for 1999 and 1998, Respectively) 6,241 3,754
Loans Receivable, Net 88,709 92,795
Real Estate Owned 248 --
Office Properties and Equipment - at
Depreciated Cost 602 493
Federal Home Loan Bank Stock 934 871
Cash Surrender Value of Life Insurance 1,211 1,159
Accrued Interest Receivable 825 856
Prepaid and Other Assets 80 112
Deferred Federal Income Tax Asset 86 436
Prepaid Federal Income Tax Asset 190 --
-------- ---------
TOTAL ASSETS $ 99,849 $ 103,611
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 70,870 $ 76,851
Borrowed Funds 13,739 12,526
Advances from Borrowers for Taxes and Insurance 341 270
Deferred Compensation 597 552
Accrued Interest Payable 76 72
Accrued Federal Income Tax Liability -- 6
Other Liabilities 564 621
-------- ---------
TOTAL LIABILITIES 86,187 90,898
-------- ---------
STOCKHOLDERS' EQUITY
Common Stock of $.01 Par Value; 4,000,000 Shares Authorized;
1,573,775 Shares Issued; 1,474,321 Shares Outstanding as of
1999 and 1998 16 16
Additional Paid-In Capital 7,659 7,594
Shares Acquired by Employee Stock Ownership Plan (387) (498)
Shares Acquired by MRP Trust (428) (550)
Retained Earnings - Substantially Restricted 8,182 7,531
Treasury Stock (1,380) (1,380)
-------- ---------
TOTAL STOCKHOLDERS' EQUITY 13,662 12,713
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 99,849 $ 103,611
======== =========
</TABLE>
See auditors' report and accompanying notes.
18
<PAGE> 21
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------
1999 1998 1997
------ ------- ------
<S> <C> <C> <C>
Interest Income
Interest on Loans $7,762 $ 8,079 $7,499
Interest on Investment Securities 280 210 254
Interest on Mortgage-Backed Securities -- 1 50
Other Interest and Dividends 271 212 167
------ ------- ------
Total Interest Income 8,313 8,502 7,970
------ ------- ------
INTEREST EXPENSE
Deposits 3,843 3,938 3,615
Borrowed Funds 639 521 523
------ ------- ------
Total Interest Expense 4,482 4,459 4,138
------ ------- ------
Net Interest Income 3,831 4,043 3,832
Provision for Losses on Loans 68 285 137
------ ------- ------
Net Interest Income After Provision for
Losses on Loans 3,763 3,758 3,695
------ ------- ------
OTHER INCOME
Fees and Charges 102 143 133
Other 134 136 135
------ ------- ------
Total Other Income 236 279 268
------ ------- ------
GENERAL AND ADMINISTRATIVE EXPENSES
Compensation and Employee Benefits 1,357 1,401 1,168
Franchise and Other Taxes 145 151 116
Federal Insurance Premium 40 44 71
Expenses of Premises and Equipment 198 210 175
Professional Services, Fees 205 227 258
Data Processing and Related Contract Services 178 154 137
Other Operating Expenses 326 318 312
------ ------- ------
Total General and Administrative Expenses 2,449 2,505 2,237
------ ------- ------
Income Before Income Tax 1,550 1,532 1,726
Federal Income Tax Expense 530 543 587
------ ------- ------
NET INCOME 1,020 989 1,139
Other Comprehensive Income, Net of Tax Effects
Unrealized Gains (Losses) on AFS Securities -- (8) --
------ ------- ------
COMPREHENSIVE INCOME $1,020 $ 981 $1,139
====== ======= ======
BASIC EPS .71 .70 .79
====== ======= ======
DILUTED EPS .68 .66 .75
====== ======= ======
</TABLE>
See auditors' report and accompanying notes.
19
<PAGE> 22
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL SHARES SHARES GAINS (LOSSES) TOTAL
COMMON PAID-IN ACQUIRED ACQUIRED BY RETAINED TREASURY ON AFS STOCKHOLDERS'
STOCK CAPITAL BY ESOP MRP TRUST EARNINGS STOCK SECURITIES EQUITY
------ ------- ---------- ----------- -------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $16 $ 9,387 $(847) $(793) $8,165 $ -- $ 8 $15,936
Net Income -- -- -- -- 1,139 -- -- 1,139
ESOP Common Stock Released
for Allocation -- 25 103 -- -- -- -- 128
Stock Compensation Plan Expense -- 24 -- 121 -- -- -- 145
Treasury Stock Acquired -- -- -- -- -- (1,103) -- (1,103)
Dividends Declared -- -- -- -- (452) -- -- (452)
--- ------- ----- ----- ------ ------- -------- -------
Balance at September 30, 1997 16 9,436 (744) (672) 8,852 (1,103) 8 15,793
Net Income -- -- -- -- 989 -- -- 989
Unrealized Gain on AFS Securities
Net of Tax Effect -- -- -- -- -- -- (8) (8)
ESOP Common Stock Released
for Allocation -- 61 246 -- -- -- -- 307
Treasury Stock Acquired -- -- -- -- -- (277) -- (277)
Stock Compensation Plan Expense -- 210 -- 122 -- -- -- 332
Dividends Declared -- (2,113) -- -- (2,310) -- -- (4,423)
--- ------- ----- ----- ------ ------- -------- -------
Balance at September 30, 1998 16 7,594 (498) (550) 7,531 (1,380) -- 12,713
Net Income -- -- -- -- 1,020 -- -- 1,020
ESOP Common Stock Released
for Allocation -- 63 111 -- -- -- -- 174
Stock Compensation Plan Expense -- 2 -- 122 -- -- -- 124
Dividends Declared -- -- -- -- (369) -- -- (369)
--- ------- ----- ----- ------ ------- -------- -------
Balance at September 30, 1999 $16 $ 7,659 $(387) $(428) $8,182 $(1,380) $ -- $13,662
=== ======= ===== ===== ====== ======= ======== ========
</TABLE>
See auditors' report and accompanying notes.
20
<PAGE> 23
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,020 $ 989 $ 1,139
Reconciliation of Net Income
with Cash Flows from Operations
Allowance for Losses on Loans 68 285 137
Depreciation 82 106 77
Deferred Federal Income Taxes 350 (350) 171
Amortization (223) (266) (292)
FHLB Stock Dividends (63) (59) (52)
(Gain) Loss on Disposal of Real Estate Owned (7) -- 4
ESOP Shares Released 174 307 128
Amortization of Stock Compensation Plans 186 319 145
Changes In
Accrued Interest Receivable 31 (86) (128)
Prepaid and Other Assets 32 (20) 25
Cash Surrender Value of Life Insurance (52) (45) (46)
Deferred Compensation 45 48 128
Accrued Interest Payable 4 13 (1)
Prepaid/Accrued Federal Income Tax Liability (196) 34 (114)
Other Liabilities (57) 29 (307)
------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,394 1,304 1,014
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturity of Investment Securities 2,500 2,891 3,000
Purchase of Investment Securities (4,987) (2,860) (1,988)
Loan Originations and Repayments, Net 3,396 (4,531) (10,375)
Purchase of FHLB Stock -- (26) (33)
Principal Received on Mortgage-Backed Securities -- -- 18
Proceeds from the Sale of Real Estate Acquired
through Foreclosure 543 184 64
Purchase of Office Equipment (192) (28) (4)
------- -------- --------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 1,260 (4,370) (9,318)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Deposits (5,981) 4,993 8,127
Dividends Paid (369) (4,423) (452)
Common Stock Purchased for Treasury / MRP Trust -- (277) (1,103)
Advance from Borrowers for Taxes and Insurance 71 42 41
Repayments of Borrowings (4,537) (11,020) (4,558)
Proceeds from Borrowings 5,750 14,700 6,650
------- -------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (5,066) 4,015 8,705
------- -------- --------
CHANGES IN CASH AND CASH EQUIVALENTS (2,412) 949 401
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,135 2,186 1,785
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 723 $ 3,135 $ 2,186
======= ======== ========
</TABLE>
See auditors' report and accompanying notes.
21
<PAGE> 24
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ACCOUNTING POLICIES
Fort Thomas Financial Corporation (the Company) provides financial services
to individuals and corporate customers, and is subject to competition from
other financial institutions. The Company is also subject to the regulations
of certain Federal agencies and undergoes periodic examinations by those
regulatory authorities.
The Company is a holding company whose activities are primarily limited to
holding the stock of Fort Thomas Savings Bank (the Bank). The Bank conducts
a general banking business in Northern Kentucky which consists of attracting
deposits from the general public and primarily applying those funds to the
origination of loans for residential, consumer and nonresidential purposes.
The Bank's profitability is significantly dependent on net interest income,
which is the difference between interest income generated from interest
earning assets (i.e., loans and investments) and the interest expense paid
on interest-bearing liabilities (i.e., customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Bank can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside management's control.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Fort Thomas
Financial Corporation and its subsidiary, Fort Thomas Savings Bank, FSB. All
material intercompany balances and transactions have been eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the statement of financial condition and revenues and expenses
for the year. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains appraisals for significant properties.
A substantial portion of the Bank's loans are secured by real estate in
local markets. In addition, foreclosed real estate is located in this same
market. Accordingly, the ultimate collectibility of a substantial portion of
the Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of foreclosed real estate are susceptible to changes in
local market conditions.
22
<PAGE> 25
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
While management uses available information to recognize losses on
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically
review the Bank's allowances for losses on loans and foreclosed real estate.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination.
FHLB STOCK
The Bank, as a member of the Federal Home Loan Bank System, is required by
law to maintain an investment in capital stock of the Federal Home Loan Bank
of Cincinnati (FHLB). The stock is recorded at cost, which represents
anticipated redemption value.
INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
The Company's investments and mortgage-backed securities are classified in
three categories and accounted for as follows:
Trading Securities
Investment securities held principally for resale in the near term
and mortgage-backed securities held for sale in conjunction with the
Company's mortgage banking activities are classified as trading
securities and recorded at their fair values. Unrealized gains and
losses on trading securities are included in other income. The
Company currently has no investments in this category.
Securities Held to Maturity
Investment securities and mortgage-backed securities for which the
Company has the positive intent and ability to hold until maturity
are reported at cost, adjusted for amortization of premiums and
accretion of discounts which are recognized in interest income using
the interest method over the period to maturity.
Available for Sale Securities
Securities available for sale consist of bonds, notes, debentures and
certain equity securities not classified as trading securities or as
securities to be held to maturity. Unrealized holding gains and
losses, net of tax, on securities available for sale are reported as
a net amount in a separate component of stockholders' equity until
realized. Gains and losses on the sale of securities available for
sale are determined using the specific-identification method.
23
<PAGE> 26
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Mortgage-backed securities represent participating interests in pools of
long-term first mortgage loans originated and serviced by issuers of the
securities. Premiums and discounts are amortized using methods approximating
the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments.
FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company does not participate in interest-rate exchange agreements,
hedging or other similar financial instruments.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances less the allowance
for loan losses, loans in process and deferred loan-origination fees.
Interest is accrued as earned unless the collectibility of the loan is in
doubt.
Loans are placed on nonaccrual when principal or interest is delinquent for
90 days or more. Any unpaid interest previously accrued on those loans is
reversed from income, and thereafter interest is recognized only to the
extent of payments received.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of
the related loans using the interest method. Amortization of deferred loan
fees is discontinued when a loan is placed on a nonaccrual status.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb potential losses inherent in
the loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the nature
of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. The allowance
is increased by a provision for loan losses, which is charged to expense,
and reduced by charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the provision for loan
losses.
In June 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, which was subsequently amended by SFAS
No. 118 as to certain income recognition and financial statement disclosure
provisions, requires that impaired loans be measured based upon the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as an alternative, at the loan's observable market price
or fair value of the collateral. The Company's current procedures for
evaluating impaired loans result in carrying such loans at the lower of cost
or fair value.
The Company adopted SFAS No. 114, as subsequently amended, on October 1,
1995, without material effect on consolidated financial condition or results
of operations.
24
<PAGE> 27
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company considers
its investment in one-to-four family residential loans and consumer
installment loans to be homogeneous and, therefore, excluded from separate
identification for evaluation of impairment. With respect to the Company,
investment in impaired nonresidential and multifamily residential real
estate loans, such loans are generally collateral dependent and, as a
result, are carried as a practical expedient at the lower of cost or fair
value. Collateral dependent loans which are more than ninety days delinquent
are considered to constitute more than a minimum delay in repayment and are
evaluated for impairment under SFAS No. 114 at this time.
At September 30, 1999 and 1998, the Company had no loans that would be
defined as impaired under SFAS No. 114.
PROVISION FOR LOSSES
Provision for losses includes charges to reduce the recorded balances of
mortgage loans receivable, uncollected interest and real estate to their
estimated net realizable value or fair value, as applicable. Such provisions
are based on management's estimate of net realizable value or fair value of
the collateral, as applicable, considering the current and currently
anticipated future operating or sales conditions, thereby causing these
estimates to be particularly susceptible to changes that could result in a
material adjustment to results of operations in the near term. Recovery of
the carrying value of such loans and real estate is dependent to a great
extent on economic, operating and other conditions that may be beyond the
Bank's control. It is the opinion of management, however, that adequate
provisions have been made for losses on loans and real estate.
LOAN ORIGINATION FEES
Loan origination fees net of direct loan origination costs are offset and
the resulting net amount is deferred and amortized over the life of the
related loans as an adjustment to the yield. In addition, commitment fees
are required to be offset against certain related direct loan origination
costs and generally recognized over the contractual life of the related
loans as an adjustment of yield if the commitment is exercised. If the
commitment expires unexercised, the fee is recognized as income upon
expiration of the commitment.
OFFICE PROPERTIES AND EQUIPMENT
The cost of office properties and equipment is depreciated over the
estimated useful lives of the related assets. Depreciation is computed on
the straight-line and accelerated methods.
25
<PAGE> 28
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
Maintenance and repairs are charged to operations when incurred. Significant
betterments and renewals are capitalized. When office properties and
equipment are sold or otherwise disposed of, the asset account and related
accumulated depreciation account are relieved, and any gain or loss is
included in operations.
The useful lives of office properties and equipment for purposes of
computing depreciation are:
<TABLE>
<S> <C>
Office Properties 15-35 Years
Equipment 5-10 Years
</TABLE>
REAL ESTATE OWNED
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are
recorded if the properties' fair value subsequently declines below the
amount determined at the recording date. In determining the lower of cost or
fair value at acquisition, costs relating to development and improvement of
property are capitalized. Costs relating to holding real estate acquired
through foreclosure, net of rental income, are charged against earnings as
incurred.
FEDERAL INCOME TAXES
The Company accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Company's activities within the current
and previous years. Pursuant to the provisions of SFAS No. 109, a deferred
tax liability or deferred tax asset is computed by applying the current
statutory tax rates to net taxable or deductible differences between the tax
basis of an asset or liability and its reported amount in the consolidated
financial statements that will result in taxable or deductible amounts in
future periods. Deferred tax assets are recorded only to the extent that the
amount of net deductible temporary differences or carryforward attributes
may be utilized against current period earnings, carried back against prior
years earnings, offset against taxable temporary differences reversing in
future periods or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets to
the extent that the value of net deductible temporary differences and
carryforward attributes exceeds management's estimates of taxes payable on
future taxable income. Deferred tax liabilities are provided on the total
amount of net temporary differences taxable in the future.
STOCK BENEFIT PLANS
In conjunction with its common stock offering, the Company implemented an
Employee Stock Ownership Plan (ESOP). The ESOP provides retirement benefits
for substantially all full-time employees who have completed one year of
service. The Company accounts for the ESOP in accordance with Statement of
Position
26
<PAGE> 29
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 1 - ACCOUNTING POLICIES (CONTINUED)
(SOP) 93-6, "Employer's Accounting for Employee Stock Ownership Plans". SOP
93-6 changed the measure of compensation expense recorded by employers from
the cost of allocated ESOP shares to the fair value of ESOP shares allocated
to participants during a fiscal year. Expense recognized related to the plan
totaled approximately $174,000, $307,000 and $128,000 for the years ended
September 30, 1999, 1998, and 1997, respectively.
The Company also has a Management Recognition Plan (MRP). Subsequent to the
offering, the MRP purchased 62,951 shares of common stock in the open
market. During fiscal year 1999, 8,560 shares available, under the plan,
were issued to executive officers and members of the Board of Directors of
the Company. Common stock granted under the MRP vests ratably over a five
year period, commencing in December 1996. Provisions of $124,000, $332,000,
and $145,000 related to the MRP were charged to expense for the fiscal years
ended September 30, 1999,1998 and 1997, respectively.
Also, the Board of Directors adopted a Stock Option Plan that provided for
the issuance of 110,164 shares of common stock at fair market value at the
date of grant. During previous years, the Company granted options to
purchase shares to members of the Board of Directors and executive officers
at fair value according to the following table:
<TABLE>
<CAPTION>
Exercise
Date Issued Shares Price
----------- ------ -----
<S> <C> <C>
1996 107,016 $ 6.91
1997 3,148 12.82
-------
110,164
=======
</TABLE>
As of September 30, 1999, none of the stock options granted have been
exercised.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs totaled
$67,572, $44,719 and $45,447 for the years ended September 30, 1999, 1998
and 1997, respectively.
TREASURY STOCK
Treasury stock is shown at cost, and in 1999, 1998, and 1997 consists of
99,454, 99,454, and 78,689 shares of common stock, respectively.
RECLASSIFICATIONS
Certain amounts in the prior-year financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current-year financial statements.
27
<PAGE> 30
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 2 - CASH FLOWS INFORMATION
For purposes of the cash flows statement, cash includes cash and cash
equivalents on hand and in demand and time accounts and certificates of
deposit with three months or less maturity.
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
Years Ended
September 30,
----------------------------
1999 1998 1997
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Interest $4,479 $4,139 $3,487
====== ====== ======
Income Taxes $ 358 $ 530 $ 481
====== ====== ======
</TABLE>
The Company had noncash investing or financing activities as follows:
<TABLE>
<S> <C> <C> <C>
Real Estate Acquired
through Foreclosure
of Mortgage Loans $936 $283 $64
==== ==== ===
FHLB Stock Dividend
Received $ 63 $ 59 $52
==== ==== ===
</TABLE>
The balance in cash and cash equivalents as of and September 30, 1999, 1998
and 1997 consists of the following:
<TABLE>
<S> <C> <C> <C>
Cash on Hand $357 $ 194 $ 167
Cash in Demand Accounts:
Interest Bearing 305 2,498 1,947
Non-Interest Bearing 61 443 72
---- ------ ------
Totals $723 $3,135 $2,186
==== ====== ======
</TABLE>
NOTE 3 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities held to maturity as of September 30, 1999 and 1998
consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
(In Thousands)
1999
----
<S> <C> <C> <C> <C>
U.S. Government and
Federal Agencies $6,241 $ -- $160 $6,081
====== ====== ==== ======
</TABLE>
28
<PAGE> 31
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 3 - INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
(CONTINUED)
<TABLE>
<CAPTION>
Gross Gross Estimated
Carrying Unrealized Unrealized Market
Value Gains Losses Value
----- ----- ------ -----
(In Thousands)
1998
----
<S> <C> <C> <C> <C>
U.S. Government and
Federal Agencies $3,754 $ 9 $ 1 $3,762
===== == == =====
</TABLE>
The following is a summary of maturities of securities held-to-maturity as
of September 30, 1999:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
-------- ----------
(In Thousands)
<S> <C> <C>
Over One Year Through Five Years $5,500 $5,340
Over Five Through Ten Years - -
Over Ten Years 741 741
------ ------
$6,241 $6,081
====== ======
</TABLE>
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The balances in loans receivable as of September 30, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
Real Estate Mortgage Loans:
One to Four Family $76,468 $78,969
Multi-Family Residential 5,600 11,070
Land and Construction:
Residential 6,215 5,531
Commercial 3,969 -
Consumer Loans:
Savings Accounts Loans 721 665
Other Consumer Loans 392 449
------- -------
Total 93,365 96,864
Less:
Loans in Process 3,489 2,572
Deferred Loan Origination Fees 553 613
Allowances for Losses 614 704
------- -------
Loans Receivable - Net $88,709 $92,795
======= =======
</TABLE>
29
<PAGE> 32
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
(CONTINUED)
A summary of activity in the allowance for loan losses at September 30,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
(In Thousands)
<S> <C> <C> <C>
Balance at Beginning of the Year $ 704 $ 476 $366
Additions to Allowance 68 285 137
Recoveries (Charge Offs) During the Year (158) ( 57) ( 27)
----- ----- ----
Balance at End of the Year $ 614 $ 704 $476
===== ===== ====
</TABLE>
At September 30, 1999, 1998 and 1997 the Bank had non-accrual loans of
approximately $2,263,000, $3,519,000 and $1,937,000, respectively. Had
interest been recognized on these loans at the original rates, interest
income would have increased approximately $63,000, $102,000 and $76,900 in
1999, 1998 and 1997, respectively. The Bank has no commitments to loan
additional funds to the borrowers of non-accrual loans.
The Bank accounts for mortgage servicing rights in accordance with SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which requires that the Bank recognize as
separate assets, rights to service mortgage loans for others.
The Bank has sold participating interests in loans in the secondary market,
retaining servicing on the loans sold. Loans sold and serviced for others
totaled approximately $1,567,000 and $1,656,000 at September 30, 1999 and
1998, respectively.
NOTE 5 - ACCRUED INTEREST RECEIVABLE
A breakdown of accrued interest receivable is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Loans Receivable $716 $793
Investments 109 63
---- ----
Total $825 $856
==== ====
</TABLE>
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT
The balance in office properties and equipment as of September 30, 1999 and
1998 consists of the following:
30
<PAGE> 33
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------ ------
<S> <C> <C>
Land $ 98 $ 98
Buildings and Improvements 940 807
Furniture and Equipment 709 651
------ ------
1,747 1,556
Accumulated Depreciation (1,145) (1,063)
------ ------
Office Properties and Equipment at
Depreciated Cost $ 602 $ 493
====== ======
</TABLE>
NOTE 7 - BORROWED FUNDS
The Bank has two long-term advances from the FHLB. These two advances accrue
interest at 5.30% and 5.55%, respectively. Monthly principal and interest
payments on these loans are approximately $16,000 each. These loans mature
October, 2008.
The Bank has a long-term advance from the FHLB for $5,500,000. This loan
accrues interest at 5.1%. Interest only payments are due each month. This
loan matures in March, 2008.
The Bank has a long-term advance from the FHLB for $4,000,000. This loan
accrues interest at 4.82%. Interest only payments are due each month. This
loan matures in October, 2008.
The Bank has three short-term advances from the FHLB, totaling $1,750,000.
All three of these advances accrue interest at 5.59%. Interest only payments
are due each month. These advances mature in December, 1999.
These advances are collateralized by the Bank's Federal Home Loan Bank stock
and first mortgage loans. Payment of these loans prior to their due date
could result in a prepayment penalty.
The Bank had a short-term loan from Fifth Third Bank for $4,000,000 with
interest at the prime rate (8.25% at September 30, 1998). This loan was paid
off in December 1998.
31
<PAGE> 34
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 7 - BORROWED FUNDS (CONTINUED)
Maturities for the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
Maturing in Years Long-Term Short-Term
Ending September 30, Borrowings Borrowings Total
-------------------- ---------- ----------- -------
(In Thousands)
<S> <C> <C> <C>
2000 $ 218 $1,750 $ 1,968
2001 230 - 230
2002 243 - 243
2003 256 - 256
2004 271 - 271
Thereafter 10,771 - 10,771
------- ------ -------
$11,989 $1,750 $13,739
======= ====== =======
</TABLE>
NOTE 8 - DEPOSITS
A breakdown of deposit balances by interest rate and major type as of
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------
1999 1998
----------------------- ----------------------
Deposit Type and Weighted Amount Percent Amount Percent
Average Interest Rate ------ ------- ------ -------
(In Thousands, Except Percents)
<S> <C> <C> <C> <C>
Passbooks - 2.75% in 1999
and 1998 $ 8,499 11.9% $ 8,239 10.7%
Money Market Deposit
Accounts - 2.74% in
1999 and 1998 2,120 3.0 2,311 3.0
Now Accounts - 2.002% and 2.16%
in 1999 and 1998, Respectively 4,223 6.0 3,974 5.2
------- ----- ------- -----
Total Demand, Transaction and
Passbook Deposits 14,842 20.9 14,524 18.9
------- ----- ------- -----
Certificates of Deposit
4.01% - 5.00% 15,012 21.2 1,506 2.0
5.01% - 6.00% 31,834 44.9 30,346 39.5
6.01% - 7.00% 9,182 13.0 30,475 39.6
------- ----- ------- -----
Total Certificates of Deposits 56,028 79.1 62,327 81.1
------- ----- ------- -----
Totals $70,870 100.0% $76,851 100.0%
======= ===== ======= =====
</TABLE>
32
<PAGE> 35
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 8 - DEPOSITS (CONTINUED)
The aggregate amount of deposits with a minimum denomination of $100,000 was
approximately $6.9 million and $8.2 million at September 30, 1999 and 1998,
respectively. Deposits of $100,000 or less are insured by the FDIC.
Non-interest bearing deposit accounts totaled approximately $520,000 and
$316,000 for September 30, 1999 and 1998, respectively.
Savings deposit customers are primarily Northern Kentucky area individuals
and businesses.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Passbook Savings Accounts $ 242 $ 223 $ 217
Money Market Deposit Accounts 68 74 72
Certificates of Deposit 3,460 3,572 3,263
Now Accounts 73 69 63
------ ------ ------
Interest Expense on Deposits $3,843 $3,938 $3,615
====== ====== ======
</TABLE>
At September 30,1999, the scheduled maturities of certificates of deposits
are as follows:
<TABLE>
<CAPTION>
Weighted
Certificates Maturing In Average Interest
September 30, Amount Rate
------------------------ ------ -----------------
(In Thousands, Except Percents)
<S> <C> <C>
2000 $37,078 5.4%
2001 11,165 5.5
2002 3,915 5.7
2003 1,998 5.8
2004 1,862 5.4
Thereafter 10 5.1
------- ---
Total Certificates of Deposit $56,028 5.5%
======= ===
</TABLE>
NOTE 9 - RETAINED EARNINGS
The Bank was allowed (until fiscal 1996) a special bad debt deduction for
federal income tax purposes limited to a certain percentage of otherwise
taxable income. This deduction is subject to certain limitations based on
aggregate loans and savings account balances. If the amounts that qualified
for this deduction are later used for purposes other than for bad debt
losses, they will be subject to federal income tax at the then current
corporate rate. Retained earnings include approximately $1.7 million for
which federal income tax has not been provided.
33
<PAGE> 36
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 9 - RETAINED EARNINGS (CONTINUED)
Under new legislation passed August, 1996, the special bad debt deduction was
repealed for thrift institutions. The legislation also requires thrifts to
recapture, over a six-year period, bad debt reserves added since 1988. The
Bank has provided for a deferred tax liability for special bad debt
deductions since 1988.
NOTE 10 - RETIREMENT PLANS
The Company provides for death benefits (prior to retirement) or pensions for
eligible employees through its participation in the multiemployer savings and
loan industry noncontributory defined benefit retirement plan. This
multiemployer plan does not provide information on funding by employer, but
as of September 30, 1999 and 1998, the plan was fully funded. Pension expense
was $17,191, $11,492 and $11,304 for the years ended September 30, 1999, 1998
and 1997, respectively. The Company's policy is to fund pension costs when
accrued.
The Company participates in a Profit Sharing and 401(k) Plan. Employees are
eligible to participate in the 401(k) Plan after completing one year of
service with the Company and attaining age 21. The 401(k) Plan permits
participants to make voluntary tax deferred contributions in an amount up to
15% of their annual base compensation. The Company makes matching
contributions in an amount equal to 50% of each participant's contributions
that do not exceed 4% of compensation.
In addition, the Company may make discretionary contributions to the 401(k)
Plan which would be allocated to the accounts of plan participants in
proportion to each participant's compensation for the plan year. All amounts
deferred by employees are 100% vested. Vesting of matching and discretionary
contributions is 100% vested after five years of service. The Company
contributed $12,672, $10,568 and $10,563 to the 401(k) plan during the years
ended September 30, 1999, 1998 and 1997, respectively.
NOTE 11 - DEFERRED COMPENSATION PLANS
The Company has entered into a non-qualified deferred compensation plan with
certain of its officers. Under the plan, in return for the officers
relinquishing the right to a portion of their current earnings, the Company
will pay them a retirement benefit in the form of a monthly payment to be
drawn over a period of 180 months upon normal retirement. The retirement
benefit is calculated based upon the amount of compensation deferred by the
officers over a ten year period, together with a corresponding match by the
association of one-third of the deferral. Both the deferral and the match
accrue interest at 12% per year compounded monthly. Assuming normal
retirement, these payments will be paid in varying amounts between 2005 and
2033.
The Company also entered into a non-qualified deferred compensation plan with
certain of its directors. Under the plan, in return for the directors
relinquishing the right to a portion of their current fees, the Company will
pay them a retirement benefit in the form of a monthly payment to be drawn
upon retirement over a period of 60 to 120 months. The retirement benefit is
calculated based upon the amount of fees deferred
34
<PAGE> 37
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 11 - DEFERRED COMPENSATION PLANS (CONTINUED)
by the directors over a five year period together with interest accrued on
this deferral of 12% per year compounded monthly. Assuming normal retirement,
these payments will be paid in varying amounts between 1998 and 2029.
During the years ended September 30, 1999, 1998 and 1997, the net periodic
pension costs, including accrued interest and company match, under these
plans were as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1999 1998 1997
------- -------- --------
(In Thousands)
Deferred Compensation -
<S> <C> <C> <C>
Officers and Directors $ 8 $ 13 $ 73
Company Match - Officers 2 2 2
Interest Accrued on Balance 69 64 53
Benefit Payments (34) (31) --
---- ---- ----
Net Periodic Pension Costs $ 45 $ 48 $128
==== ==== ====
</TABLE>
The total accrued liability for these plans at September 30, 1999 and 1998
was $597,000 and $552,000, respectively. This liability is included in these
financial statements. The funding of these plans is to come from the general
assets of the Company.
In conjunction with the formation of these plans, the Company purchased life
insurance on the participants. The contracts are owned by the Company and
the officers and directors have no ownership rights to them. As of September
30, 1999 and 1998, the cash surrender value of these insurance contracts was
$1,211,000 and $1,159,000, respectively. The increase in the cash surrender
value of the life insurance for the years ended September 30, 1999, 1998 and
1997 was $52,000, $45,000 and $46,000, respectively. This increase is
recorded as income by the Company.
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an ESOP for its employees. As part of the
Conversion, the ESOP borrowed funds from the Company. The loan was equal to
100% of the aggregate purchase price of the Common Stock acquired by the
ESOP. The loan to the ESOP is being repaid principally from the Company's and
the Bank's contributions to the ESOP, and the collateral for the loan is the
Common Stock purchased by the ESOP. The interest rate for the ESOP loan is a
fixed rate of 9.0%. The Company may, in any plan year, make additional
discretionary contributions for the benefit of the plan participants in
either cash or shares of Common Stock, which may be acquired through the
purchase of outstanding shares in the market or from individual stockholders,
upon the original issuance of additional shares by the Company or upon the
sale of treasury shares by the Company.
Such purchases, if made, would be funded through additional borrowings by the
ESOP or additional contributions from the Company. The timing, amount and
manner of future contributions to the ESOP will be affected by various
factors, including prevailing regulatory policies, the requirements of
applicable laws and regulations and market conditions.
35
<PAGE> 38
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 12 - EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
Shares purchased by the ESOP with the proceeds of the loan are held in a
suspense account and released on a pro rata basis as debt service payments
are made. Discretionary contributions to the ESOP and shares released from
the suspense account are allocated among participants on the basis of
compensation. Forfeitures are reallocated among remaining participating
employees and may reduce any amount the Company might otherwise have
contributed to the ESOP. Participants vest in their right to receive their
account balances within the ESOP at the rate of 20% per year starting with
the completion of three years of service and will be 100% vested upon the
completion of seven years of service. Credit is given for years of service
with the Company prior to adoption of the ESOP.
Accounting principles requires that any third party borrowing by the ESOP be
reflected as a liability on the Company's statement of financial condition.
Since the ESOP borrowed from the Company, such obligation is not treated as a
liability, but is excluded from stockholders' equity. If the ESOP purchases
newly issued shares from the Company, total stockholders' equity would
neither increase nor decrease, but per share stockholders' equity and per
share net earnings would decrease as the newly issued shares are allocated to
the ESOP participants.
The ESOP is subject to the requirements of the Employee Retirement Income
Security Act of 1974 as amended ("ERISA"), and the regulations of the IRS and
the Department of Labor thereunder.
The fair value of the 38,669 unearned ESOP shares at September 30, 1999 was
approximately $604,203. Shares committed to be released during 1999 were
11,150. Shares allocated during the current year were 24,569.
The fair value of the 49,818 unearned ESOP shares at September 30, 1998 was
approximately $622,725. Shares committed to be released during 1998 were
24,569. Shares allocated during 1998 were 10,289.
NOTE 13 - INCOME TAXES
A reconciliation of income tax expense at the statutory rate (34% for all
periods) to income tax expense at the Company's effective rate is as
follows:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1999 1998 1997
---- ---- -----
(In Thousands)
<S> <C> <C> <C>
Computed Tax at the Expected
Statutory Rate $527 $521 $587
Nondeductible Expenses 3 3 2
Other Differences -- 19 (2)
---- ---- -----
Income Tax Expense $530 $543 $ 587
==== ==== =====
Effective Income Tax Rate 34.2% 35.4% 34.0%
==== ==== =====
</TABLE>
36
<PAGE> 39
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 13 - INCOME TAXES (CONTINUED)
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998 1997
---- ----- ----
(In Thousands)
<S> <C> <C> <C>
Current Tax Expense $180 $893 $416
Deferred Tax (Benefit) Expense 350 (350) 171
---- ----- ----
Income Tax Expense $530 $ 543 $587
==== ===== ====
</TABLE>
Deferred income taxes arise from temporary differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods.
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities that give rise to the deferred tax asset
at September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
September 30,
----------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Deferred Compensation Agreements (Deductible When
Paid for Taxes) $203 $188
Allowance for Loan Losses 209 239
Holding Company Loss Carryforward -- 350
Accumulated Amortization of Stock Compensation Plans 153 40
Other -- 72
---- ----
Deferred Tax Asset 565 889
---- ----
Federal Home Loan Bank Stock (Income Tax Payable
When Shares Received as Stock Dividends are Sold) 209 187
Special Tax Bad Debt Deduction 128 160
Real Estate and Equipment (Depreciation Method Differences) 2 5
Book Value of CSV of Life Insurance in Excess of
Tax Basis 118 101
Other 22 45
---- ----
Deferred Tax Liability 479 453
---- ----
Net Deferred Income Tax Asset $ 86 $436
==== ====
</TABLE>
NOTE 14 - RELATED PARTY TRANSACTIONS
The Bank has mortgage loans outstanding with various officers, directors and
employees. Loans are granted at interest rates and fees which are 1% below
the Bank's normal lending rate, but are above its cost of funds. All these
loans require board approval and will be repaid with regular monthly
payments in the ordinary course of business until the loans are paid off.
37
<PAGE> 40
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 14 - RELATED PARTY TRANSACTIONS (CONTINUED)
Activity for the year is as follows:
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance at September 30, 1998 $928
New Loans Made 275
Payments Made (368)
----
Balance at September 30, 1999 $835
====
</TABLE>
The Company had deposits from various officers, directors, and employees
totaling $986,000 and $978,000 as of September 30, 1999 and 1998,
respectively.
The Company's attorney and legal counsel serves on the Board of Directors of
the Company and is paid approximately $160,000 annually for services
rendered. The majority of these fees are reimbursed to the Bank as part of
loan costs passed through to the Bank's customers. A member of the Board of
the Directors of the Company is an insurance agent and presently assists in
placing the Bank's insurance coverage. Another member of the Board provides
appraisal services and is paid approximately $20,000 annually.
NOTE 15 - LOAN COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated statement of financial condition. The
contract amounts of the commitments reflect the extent of the Bank's
involvement in such financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses
the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
Management believes that all loan commitments are able to be funded through
cash flow from operations and existing excess liquidity. Fees received in
connection with these commitments have not been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee.
38
<PAGE> 41
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 15 - LOAN COMMITMENTS (CONTINUED)
Since many of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if it is deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral on loans may vary but the preponderance of loans
granted generally includes a mortgage interest in real estate as security.
As of September 30, 1999, the Bank had fixed and adjustable rate loan
commitments as follows:
<TABLE>
<CAPTION>
Fixed Adjustable Total
----- ---------- -----
(In Thousands, Except Percents)
<S> <C> <C> <C>
First Mortgage Loans on
One to Four Family Residential Property $1,039 $2,405 $3,444
Land and Commercial Loans -- 128 128
------ ------ ------
Total Loan Commitments $1,039 $2,533 $3,572
====== ====== ======
Weighted Average Interest Rates 9.0% 7.9% 8.2%
====== ====== ======
</TABLE>
NOTE 16 - INTEREST RATE RISK
The Bank is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At September 30, 1999, the Bank's
assets consist of significant amounts that earn interest at fixed interest
rates. Those assets were funded primarily with short-term liabilities that
have interest rates that vary with market rates over time.
At September 30, 1999, the Bank had interest earning assets of approximately
$97.4 million having a weighted average effective yield of 8.06% and with
durations of up to 30 years, and interest bearing liabilities of approximately
$84.6 million having a weighted average effective interest rate of 4.91% and
with duration of up to 11 years.
At September 30, 1998, the Bank had interest earning assets of approximately
$101.1 million having a weighted average effective yield of 8.53% and with
durations of up to 30 years, and interest bearing liabilities of
approximately $85.4 million having a weighted average effective interest rate
of 5.39% and with durations of up to 12 years. The shorter duration of the
interest-sensitive liabilities indicates that the Bank is exposed to interest
rate risk because, in a rising rate environment, liabilities will be repriced
faster at higher interest rates, thereby reducing the market value of
long-term assets and net interest income.
39
<PAGE> 42
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 17 - RECONCILIATION OF NET INCOME AND RETAINED EARNINGS
A reconciliation of the amounts reported to the Office of Thrift Supervision
(OTS) for the Bank and amounts in these audited financial statements is as
follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1999 1998 1997
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Net Income
Per OTS Report $ 1,338 $ 1,227 $ 1,200
Adjustments Made
Federal Income Tax (67) 4 (17)
Contributions (4) -- --
Depreciation (4) (37) --
Federal Deposit Insurance (11) -- --
------- ------- -------
1,252 1,194 1,183
Net Loss of Holding Company After
Eliminating Entries (232) (205) (44)
------- ------- -------
Net Income Per Consolidated
Statements of Income $ 1,020 $ 989 $ 1,139
======= ======= =======
Retained Earnings
Per OTS Report $ 5,194 $ 8,119 $ 7,009
Adjustments Made
Federal Income Tax (67) 4 (17)
Contributions (4) -- --
Depreciation (4) (37) --
Federal Deposit Insurance (11) -- --
------- ------- -------
5,108 8,086 6,992
Retained Earnings (Accumulated
Deficit) of Holding Company
After Eliminating Entries 3,074 (555) 1,860
------- ------- -------
Retained Earnings Per Consolidated
Statements of Financial
Condition $ 8,182 $ 7,531 $ 8,852
======= ======= =======
</TABLE>
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to the regulatory capital requirements of the Federal
Deposit Insurance Corporation (the "FDIC"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
40
<PAGE> 43
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
The FDIC has adopted risk-based capital ratio guidelines to which the Bank
is subject. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations. Risk-based capital ratios are
determined by allocating assets and specified off-balance-sheet commitments
to four risk-weighting categories, with higher levels of capital being
required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier ("Tier
1), includes common equity, certain non-cumulative perpetual preferred stock
(excluding auction rate issues) and minority interests in equity accounts of
consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier 2") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Banks are required to maintain a
total risk-based capital (the sum of Tier 1 and Tier 2 capital) ration of
8%, of which 4% must be Tier 1 capital. The FDIC may, however, set higher
capital requirements when particular circumstances warrant. Banks
experiencing or anticipating significant growth are expected to maintain
capital ratios, including tangible capital positions, well above the minimum
levels.
In addition, the FDIC established guidelines prescribing a minimum Tier 1
leverage ratio (Tier 1 capital adjusted total assets as specified in the
guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for banks that meet certain specified criteria, including that they have
the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier 1
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points.
As of September 30, 1999, management believes that the Bank met all capital
adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
--------------------- ---------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Total Capital
(to Risk-Weighted Assets) $13,222 19.9% $5,317 greater than or equal to 8.0%
Tier I Capital
(to Risk-Weighted Assets) 12,608 19.0 2,659 greater than or equal to 4.0
Tier I Leverage 12,608 12.8 3,946 greater than or equal to 4.0
</TABLE>
41
<PAGE> 44
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 18 - REGULATORY CAPITAL REQUIREMENTS (CONTINUED)
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements
in the foreseeable future. However, events beyond the control of the Bank,
such as increased interest rates or a downturn in the economy in the primary
market areas, could adversely affect future earnings and, consequently, the
ability to meet future minimum regulatory capital requirements.
NOTE 19 - EARNINGS PER SHARE
Basic earnings per share amount for the year ended September 30, 1999 is
based upon the average outstanding shares of the Company reduced by the
unreleased shares of the ESOP (see ESOP note).
Diluted earnings per share amount for the year ended September 30, 1999 is
based upon the basic shares outstanding, plus stock options and unissued
shares of MRP outstanding.
The basic average number of shares outstanding was 1,428,395 and 1,405,456
for the years ended September 30, 1999 and 1998, respectively. The diluted
average number of shares outstanding was 1,502,263 and 1,494,999 for the
years ended September 30, 1999 and 1998, respectively.
42
<PAGE> 45
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 20 - DIVIDENDS
During the years ended September 30, 1999, 1998 and 1997, the Company
declared dividends of $.25, $3.00 and $.30 per common share, respectively.
Of the 1998 amount, $1.43 per share was paid from funds retained by the
Company in the conversion and was deemed by management to constitute a
return of excess capital. Accordingly, the Company charged the return of
capital dividend to additional paid-in capital. Management has obtained a
Private Letter Ruling from the Internal Revenue Service which states that
the Company's dividend payments in excess of accumulated earnings and
profits are considered a tax-free return of capital for federal income tax
purposes. As a result, management believes that approximately $1.43 of the
1998 fiscal year dividends constitute a tax-free return of capital.
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
43
<PAGE> 46
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair
values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at September 30, 1999:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statement of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, such as one- to four-family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed
via discounted cash flow analysis, using current interest rates offered
for loans with similar terms to borrowers of similar credit quality. For
loans on deposit accounts and consumer and other loans, fair values were
deemed to equal the historic carrying values. The historical carrying
amount of accrued interest on loans is deemed to approximate fair value.
Federal Home Loan Bank Stock: The carrying amount presented in the
consolidated statement of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook accounts, money market
demand and escrow deposits is deemed to approximate the amount payable on
demand. Fair values of fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the interest
rates currently offered for similar deposits.
Borrowed Funds: The fair value of these advances is estimated using the
rates currently offered for similar advances of similar remaining
maturities.
Cash Surrender Value of Life Insurance: The carrying amount presented in
the consolidated financial statements is deemed to approximate fair
value.
44
<PAGE> 47
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 21 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30, 1999, are as
follows:
<TABLE>
<CAPTION>
Carrying Fair
Value Value
------- -------
(In Thousands)
<S> <C> <C>
Financial Assets
Cash and Cash Equivalents $ 723 $ 723
Investment Securities 6,241 6,081
Loans Receivable 88,709 90,501
Stock in Federal Home Loan Bank 934 934
Cash Surrender Value of Life Insurance 1,211 1,211
------- -------
$97,818 $99,450
======= =======
Financial Liabilities
Deposits $70,870 $71,020
Advances from FHLB and Other
Borrowings 13,739 13,757
Advances from Borrowers
for Taxes and Insurance 341 341
------- -------
$84,950 $85,118
======= =======
</TABLE>
45
<PAGE> 48
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 22 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the
years ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------ --------- -------- -------------
<S> <C> <C> <C> <C>
1999
Total Interest Income $2,164 $2,104 $2,071 $1,974
Total Interest Expense 1,194 1,138 1,094 1,056
- -------------------------------------------------------------------------------------------------
Net Interest Income 970 966 977 918
Provision for Losses on Loans 12 12 32 12
Other Income 60 54 63 59
General, Administrative and
Other Expense 563 665 584 637
- -------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 455 343 424 328
Federal Income Taxes 160 131 151 88
- -------------------------------------------------------------------------------------------------
Net Earnings $ 295 $ 212 $ 273 $ 240
=================================================================================================
Earnings Per Share:
Basic $ .21 $ .15 $ .19 $ .16
=================================================================================================
Diluted $ .20 $ .14 $ .18 $ .16
=================================================================================================
1998
Total Interest Income $2,076 $2,118 $2,174 $2,134
Total Interest Expense 1,108 1,131 1,105 1,115
- -------------------------------------------------------------------------------------------------
Net Interest Income 968 987 1,069 1,019
Provision for Losses on Loans 12 12 157 104
Other Income 75 62 88 54
General, Administrative and
Other Expense 556 645 547 757
- -------------------------------------------------------------------------------------------------
Earnings Before Income Taxes 475 392 453 212
Federal Income Taxes 169 144 158 72
- -------------------------------------------------------------------------------------------------
Net Earnings $ 306 $ 248 $ 295 $ 140
=================================================================================================
Earnings Per Share:
Basic 0.22 0.18 0.21 0.09
=================================================================================================
Diluted 0.21 0.17 0.20 0.08
=================================================================================================
</TABLE>
46
<PAGE> 49
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS
FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Fort Thomas Financial Corporation as of September 30, 1999 and
1998, and the results of operations and cash flows for the years ended
September 30, 1999, 1998 and 1997.
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
ASSETS
Cash and Cash Equivalents $ 276 $ 399
Investment Securities Held to Maturity - at Cost 741 753
Investment in Fort Thomas Savings Bank 8,544 11,722
Loan Receivable - ESOP 387 498
Other Assets 459 339
-------- --------
TOTAL ASSETS $ 10,407 $ 13,711
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Borrowed Funds $ -- $ 4,000
Other Liabilities 422 463
-------- --------
TOTAL LIABILITIES 422 4,463
-------- --------
STOCKHOLDERS' EQUITY
Common Stock and Additional Paid-In Capital 7,661 7,247
Treasury Stock (1,380) (1,380)
Retained Earnings 3,704 3,381
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,985 9,248
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,407 $ 13,711
======== ========
</TABLE>
47
<PAGE> 50
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS
FINANCIAL CORPORATION (CONTINUED)
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
REVENUE
Interest Income $ 92 $ 104 $ 190
Equity in Earnings of Fort Thomas
Savings Bank 1,236 1,294 1,183
------- ------- -------
Total Revenue 1,328 1,398 1,373
GENERAL AND ADMINISTRATIVE EXPENSES 428 566 133
------- ------- -------
Net Income Before Income Taxes 900 832 1,240
Federal Income Tax (Benefit) (120) (157) (101)
------- ------- -------
Net Income Before Dividend Income 1,020 989 1,139
Dividend Income From Fort Thomas
Savings Bank 4,200 -- 3,000
------- ------- -------
NET INCOME $ 5,220 $ 989 $ 4,139
======= ======= =======
</TABLE>
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income Before Dividend Income $ 1,020 $ 989 $ 1,139
Reconciliation of Net Income with
Cash Flows from Operations:
Undistributed Earnings of Consolidated
Subsidiary (1,236) (1,294) (1,183)
Deferred Federal Income Tax 350 (155) (89)
Amortization of Stock Compensation Plans 86 109 145
Shares Released to ESOP 174 307 128
Changes In
Accrued Interest Receivable -- 10 (15)
Accrued Federal Income Tax Asset (Liability) (470) -- (97)
Other Liabilities (41) (8) 91
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES (117) (42) 97
------- ------- -------
</TABLE>
48
<PAGE> 51
FORT THOMAS FINANCIAL CORPORATION AND SUBSIDIARY
NOTE 23 - CONDENSED FINANCIAL STATEMENTS OF FORT THOMAS
FINANCIAL CORPORATION (CONTINUED)
FORT THOMAS FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Repayment of Loan to ESOP 163 370 127
Purchase of Investment Securities -- (753) --
Maturity of Investment Securities -- -- 494
Maturity of Mortgage-Backed Securities -- 799 --
Principal Received on Mortgage-Backed Securities -- -- (17)
------- ------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 163 416 604
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid (369) (4,423) (452)
Dividends Received 4,200 -- 3,000
Treasury Stock Purchased -- (277) (1,103)
Repayment of Borrowings (4,000) -- (2,300)
Proceeds from Borrowings -- 4,000 --
------- ------- -------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (169) (700) (855)
------- ------- -------
CHANGES IN CASH AND CASH EQUIVALENTS (123) (326) (154)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 399 725 879
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 276 $ 399 $ 725
======= ======= =======
</TABLE>
NOTE 24 - SUBSEQUENT EVENT
On December 21, 1999 the Company and The Bank of Kentucky Financial
Corporation agreed in principle that all of the Company's outstanding common
stock would be acquired by The Bank of Kentucky Financial Corporation in a
business combination expected to be accounted for as a pooling of interests.
Upon approval of the Company's shareholders and regulatory agencies,
shareholders of the Company will receive .5645 shares of The Bank of Kentucky
Financial Corporation's common stock for each of their shares of the Company's
common stock.
49
<PAGE> 52
FORT THOMAS FINANCIAL CORPORATION
FORT THOMAS SAVINGS BANK, F.S.B.
DIRECTORS
LARRY N. HATFIELD
Director, President and
Chief Executive Officer
ROBERT L. GRIMM
Chairman of the Board
HAROLD A. LUERSEN
Managing Partner
Luersen & Luersen
Fort Thomas, Kentucky
DON J. BECKMEYER
President
Beckmeyer Insurance Agency, Inc.
Newport, Kentucky
J. STEVEN MCLANE
President
Disney-McLane, Inc.
Cincinnati, Ohio
BANKING LOCATIONS
MAIN OFFICE:
25 North Fort Thomas Avenue
Fort Thomas, Kentucky
BRANCH OFFICE:
7612 Alexandria Pike
Alexandria, Kentucky
OFFICERS
LARRY N. HATFIELD
Director, President and
Chief Executive Officer
J. MICHAEL LONNEMANN
Vice President and Secretary
50
<PAGE> 53
STOCKHOLDER INFORMATION
Fort Thomas Financial Corporation is a unitary savings and loan holding
company conducting business through its wholly-owned subsidiary, Fort Thomas
Savings Bank, F.S.B. The Savings Bank is a federally-chartered, SAIF-insured
savings institution operating through its two full-service offices. The
Company's headquarters is located at 25 North Fort Thomas Avenue, Fort Thomas,
Kentucky 41075.
TRANSFER OF AGENT/REGISTRAR:
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, The Fifth Third Bank.
The Fifth Third Bank (800)837-2755
Corporate Trust Services (513)579-5320
Mail Drop 1090/f5-4129
38 Fountain Square Plaza
Cincinnati, OH 45263
INDEPENDENT AUDITORS:
VonLehman & Company Inc.
250 Grandview Drive, Suite 300
Fort Mitchell, Kentucky 41017
SPECIAL LEGAL COUNSEL:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, DC 20005
STOCKHOLDER REQUESTS:
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Secretary, Fort Thomas Financial Corporation,
25 North Fort Thomas Avenue, Fort Thomas, Kentucky 41075.
Stockholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, The Fifth Third Bank.
51
